Financial Fitness With Ellen M. DeSarno

When I complete a cash flow analysis for my clients, income tax is often their largest expense. So let’s pay a lot of attention to this area, and try to minimize your current tax burden. While we can’t avoid paying taxes, here are some smart ways to defer income taxation on your earnings and investments:

Take a look at your final pay stub for 2014. How much did you contribute to your 401k? The maximum for 2014 was $17,500 ($23,000 if you’re over 50). This does not include your company’s “match”, if there is one. Your 401k contribution reduces your taxable income dollar for dollar. Growth in the 401k account is not taxed until you withdraw it.

Also on your pay stub, did you contribute to any pre-tax transit account for your commuting expenses—or a pre-tax Healthcare Spending Account for qualified “out of pocket” medical expenses?

Look at the 1099s you’ll be receiving soon on your non-retirement investments and savings accounts. Interest, dividends and capital gains are all taxable income. But there are some tax-advantaged vehicles that can help to defer taxation:

1) Traditional IRAs—If you’re not a participant in a company-sponsored retirement plan, or your income is below $70,000 single/$116,000 married (as of 2014), you may deposit up to $5,500 as a tax-deductible contribution to an IRA ($6,500 if you’re over 50). If you’re married, your spouse can also contribute, even if she has no earned income.

2) Roth IRAs—Contributions to a Roth IRA are not tax-deductible, but growth and distributions are tax-free. Limit on contributions for 2015 is $5,500 per year ($6,500 if you’re over 50).

3) Municipal bonds—Income on these bonds is free from federal income tax, and can be free of state income taxes if you live in a state with income tax, and buy your own state’s bonds.

4) Life insurance cash values—If you own a whole life, universal or variable life policy, you don’t pay tax on any growth of your cash values as they accrue. Although the death benefit is generally tax-free, distributions from a life insurance policy may be taxable.

5) Non-qualified annuities—Annuities are investment vehicles built by insurance companies to provide tax-deferred accrual until money is withdrawn. They come in many forms, with many features. You should consult with a financial professional to see what may be suitable for your particular circumstances.